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Chevron Sees Carabobo Oil in 2012

According to a company executive, U.S. energy behemoth Chevron Corp. (NYSE: CVX - News) may see the start-up of an oil field in Venezuela’s Orinoco Belt next year. The super-major is confident that it can commence production from Orinoco’s Carabobo Project 3 – which has estimated reserves of 66 billion barrels – in the third quarter of 2012.

But before that, Chevron and its partners need to take a call on how to develop the project in the next few months – full development or early production.

The Orinoco Belt, estimated to hold more than 500 billion barrels of recoverable extra-heavy crude, is widely thought to be the world’s largest liquid hydrocarbon reserve.

Chevron holds a 34% interest in Carabobo Project 3, while Venezuela's national oil company Petroleos de Venezuela S.A. (or PDVSA) controls 60%. The remaining stake is owned by Venezuelan and Japanese firms.

Following the first production of 50,000 barrels per day – the second most valuable U.S. oil company after ExxonMobil Corp. (NYSE: XOM - News) is looking to boost volumes by an additional 50,000-100,000 barrels per day every two years. Carabobo 3, one of several Orinoco projects, is estimated to reach a maximum output of approximately 400,000-480,000 barrels of crude oil per day by 2016.

Chevron also pointed out that after deciding on the project development course, it will start discussions with the state-owned PDVSA regarding further investment in the project considering that the heavy crude, like the one found in Venezuela, though cheaper to extract, is more expensive to refine owing to its high density and transport than lighter varieties of oil.

San Ramon, California-based Chevron is one of the largest publicly traded oil and gas firms in the world, based on proved reserves. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals and other energy-related businesses.

Chevron’s current oil and gas development project pipeline is among the best in the industry, boasting large, multiyear projects. Additionally, the company possesses one of the healthiest balance sheets among its peers, which helps it to capitalize on investment opportunities with the option to make strategic acquisitions.

However, due to its integrated nature, Chevron is particularly susceptible to the downside risk from continued weakness in the global economy. We are also concerned by the company’s high level of capital spending, which may result in reduced returns going forward.

As such, we see the stock performing in line with the broader market and maintain our long-term Neutral recommendation on the stock.